Darren Berg's Mercer Island mansion, pictured in a U.S. Justice Department photo. Berg spent at least $10 million of investors' money on the house.

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One of two Lear jets purchased by Darren Berg with investors' money, pictured in a U.S. Justice Department photo.

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One of several yachts purchased with investors' money by Darren Berg, pictured in a U.S. Justice Department photo.

Pushing a Ponzi scheme, Darren Berg made millions and lived well.

Mercer Island mansion. Yacht. Plane.

Yes. Yes. And double yes.

Berg’s malfeasance – the 49-year-old duped investors out of tens of millions of dollars in the largest Ponzi scheme in Washington state history – will cost him 18 years of his life. That’s the sentence federal prosecutors and his attorneys have agreed to, and the term U.S. District Court Judge Richard Jones imposed Thursday morning.

The price paid by Berg’s more than 500 victims is tougher to quantify.

On paper, Berg’s victims lost at least $120 million during the decade-long fraud. In practice, it meant retirements delayed, homes lost and faith shaken.

“Many of Mr. Berg’s victims will be forced to make significant changes to their lifestyle … such as foregoing retirement, taking additional jobs to support their children’s education and selling their homes,” Assistant U.S. Attorney Norman Barbosa told the court. “Others are likely to be forced into bankruptcy and may also lose their homes because of the financial devastation Mr. Berg’s fraud has caused.”

Schemes like the one Berg admitted to running have been snaring American investors for at least a century. Berg’s victims joined the thousands of others caught up in similar schemes operated by Bernie Madoff, Charles Ponzi – the 1920s crook for whom the scam is named – and the countless confidence men in between.

Speaking Wednesday, Kenneth Hines, the IRS special agent-in-charge for the Pacific Northwest, described the toll investment scams take on their victims.

Hines, who investigated similar cases elsewhere in the country, said scam artists prey on personal relationships – friendships, religious or professional associations, sometimes family ties – to gain the trust of their victims. And, unfortunately, they’re often able to succeed.

“I’ve seen lawyers, doctors, accountants, law enforcement, people of every educational level sucked into investment schemes,” said Hines, who declined to discuss Berg’s case prior to Thursday’s sentencing hearing.

“They’ve done nothing wrong,” he continued. “They got suckered into a Ponzi scheme by somebody who does this for a living. They’ve been conned, and the reason (a conman) does it is because they’re good at it.”

Hines said there is no simple trick to detecting a whether an investment is a sham.

The strongest warning sign, though, is the promise of unrealistically high returns. Would-be investors would do well to review the backgrounds and qualifications of those they might invest with, and consider talking it out with an outside accountant or trusted advisor. Hines also suggested investors demand to see the real property or stock certificates they believe they’re investing in.

Of course, prosecutors note Berg bilked investment professionals, millionaires and “ordinary” people looking to wisely invest their retirement. Most of them are unlikely to see all their money returned.

An ‘extremely risky investment’

Berg started in white collar crime in 1987, when he launched – and was caught in – a check-kiting scheme. Berg was also alleged to have embezzled thousands of dollars from a University of Oregon fraternity.

He dropped out of college around the same time. Berg, despite his criminal history and educational failure, was able to cobble together a career in business that ultimately saw him launch a legitimate mortgage investment firm. Trading on that reputation, Berg started swindling investors in 2001.

Berg launched the investment firm – later known as Meridian Group – with three friends after moving to Seattle in 1987. Berg’s looting of the investment fund forced it into bankruptcy in June 2010.

Ostensibly, Berg’s business dealt in was seller-financed real estate mortgages – home or commercial property loans made by the owner to a buyer, who would otherwise have to secure a mortgage through an outside lender. Berg’s investment funds would buy the seller’s stake in a property – paying a lump sum less than what the buyer would pay over time – and begin receiving mortgage payments from the property’s buyer.

“Seller-financed loans are often made to borrowers who could not obtain traditional financing because of credit problems, questionable land values, or other deficiencies that disqualify the borrower,” Barbosa told the court. “Investing in seller-financed real estate loans requires a very specialized skill set that is not available to the typical investor. …

“In other words, it has all the makings of a good myth that an experienced conman can work to his advantage.”

Bubble trouble for Berg

Meridian Group continued to operate in the seller-financed real estate market through the 1990s. The firm itself bounced between lenders while making its money brokering loans until 2001, when Berg came up with a plan to raise capital through a series of investment funds.

In January 2001, Berg began soliciting investments, telling would-be investors their money would be used to buy seller-financed real estate contracts and fund short-term loans backed by money or property. Borrower payments were to form the return to investors.

Strangely enough, the loosening of lending restrictions by banks that ultimately led to the 2008 mortgage crisis – and the Great Recession – dried up the sell-financed real estate market Berg intended to dive into. Borrowers that would have had to turn to firms like his found willing lenders in the banks.

Unable to find investment opportunities, Berg was “wildly successful” in his search for investors, Barbosa told the court. Of course, he was promising investors their money would be going to nearly default-proof loans.

“Throughout the entire course of his investment funds, Mr. Berg routinely assured his victims that their investments were safe from the typical market forces that might negatively impact other loan portfolios,” Barbosa told the court.

Speaking with investigators, an apparently conflicted Berg described himself as “snowed under in money,” and attempted to explain why he didn’t just sent back his investors’ money – or stop soliciting investments – when he couldn’t find enough loans to make.

“There’s only one thing you can do to make people madder than being in a deal that blows up,” Berg told federal investigators. “That’s being in a deal where you just send them all their money back. …

“I look back on that now and I think that’s probably bull(expletive).”

Yachts, planes bought with investor money

Berg started stealing almost immediately after launching the investment funds, buying gifts for family and friends. He went big fast.

In February 2002 he bought a 53-foot yacht with investors’ money. Then he raided another fund to launch a luxury bus line, dumping about $45 million of investor money into the venture between 2003 and 2010.

Using investors’ money, Berg bought a $2 million condo in downtown Seattle, a $1.25 million house in La Quinta, Calif., a $1.4 million condo in San Francisco and a $5.5 million waterfront mansion on Mercer Island. He spent another $5 million remodeling the Mercer Island estate, also stolen from investors.

Then there were the planes – a pair of Lear jets, bought and operated for $5.5 million – and several other yachts maintained at investor expense.

To keep the scheme rolling, Berg began paying existing investors with new investors’ money. Barbosa described it as a “classic Ponzi scheme.”

As the fraud went on, it also grew more complex. Berg created fake loans, then funded them.

The scam began to come apart in 2009, when one of Berg’s largest investors – Cornerstone Investments – asked to cash out its $30 million dollar investment. When Berg was unable to pay, Cornerstone sued Berg claiming somewhat correctly that he’d used the investment to pay off other investors.

Berg launched a second set of investment funds in an effort to pay off his older investors. He managed to take in another $16 million between March 2009 and August 2010, when the house of cards he’d build collapsed.

Meridian went bankrupt and Berg was arrested in October 2010. Still, Berg was slow to admit his crimes, Barbosa told the court.

“He has spent much of that time casting blame on others for the massive fraud that he committed,” Barbosa told the court.

Even after he knew the federal investigators were interested in his dealings, Berg attempted to hide $400,000. He used the money to make lease payment on two Porsche automobiles, buy an Audi and pay advance rent on a Los Angeles apartment.

Total loss still in question

Reviewing Berg’s 93 bank accounts, an IRS Criminal Investigation Division special agent working with accountants from the FBI and state Department of Financial Institutions waded through Berg’s financial machinations in an attempt to determine exactly how much he had taken and how many people he has hurt.

All told, they believe 844 investors were caught in Berg’s scheme. Their total loss, the investigators found, was $123 million, though about $10 million has been returned.

Writing the court, Berg’s attorneys Michael Nance and Russell Aoki argued that the actual loss might be slightly lower – in the neighborhood of $100 million. They also suggested on their client’s behalf that the fraud may not have technically become a Ponzi scheme until 2008.

More to the point, the defense attorneys noted Berg launched the business in good faith and only began paying investors with other investors’ money after the business began to fail.

“Mr. Berg’s business was not designed to be a fraud from the beginning,” the defense attorneys told the court. “Instead, it was a legitimate business that, due to dramatic adverse changes in the market, prompted him to act out of desperation in hopes of keeping his businesses alive and his investors satisfied.”

Responding to that claim, Barbosa argued in court documents that many of Berg’s “investments” weren’t invested anywhere and, as such, were not victim to the economic downturn.

An abuse of trust

Writing the court, Barbosa noted that Berg’s victims varied in their backgrounds. Some were “sophisticated investors” with millions of dollars invested in Berg. Others were ordinary people looking to find safe harbor for their retirement money.

Berg, the federal prosecutor told the court, knew the people he was bilking well. He sat down with several when the real estate market was collapsing to reassure them. He stole from trust accounts created by elderly clients, whose money he was managing personally.

“Mr. Berg’s fraud is by far the largest Ponzi scheme ever prosecuted in the State of Washington,” Barbosa told the court, adding that the victims “stand little chance of recovering the vast majority of the money they entrusted to Mr. Berg.”

Pleading guilty last year, Berg admitted to wire fraud, money laundering and bankruptcy fraud. The plea agreement remained binding so long as Berg is sentenced to 18 years in prison.

Sentencing Berg, Judge Jones told Berg he had “reckless disregard for his victims… and had no moral compass,” according to a U.S. Attorney's Office statement.

“This defendant stole and squandered the dreams of hundreds: dreams of retirement, dreams of homeownership, dreams of a college education for their children and grandchildren," Durkan said in a statement. "While we could not restore those dreams, today he was held accountable for his acts.”

Currently jailed, Berg was sentenced by Jones on Thursday morning at the U.S. District Court in Seattle. In addition to the prison term, the judge recomended Berg recieve drug treatment. A restitution hearing is scheduled for April 6.